Modine Stock Just Soared 29% on a Report That Samsung Wants to Buy It. Is It Too Late to Buy?

Shares of Modine Manufacturing (NYSE:MOD) soared about 29% to roughly $137 on Friday afternoon after Bloomberg reported that Samsung Electronics is in talks to buy the Wisconsin company. The talks could produce a deal in the coming weeks, according to the report, but no final decision has been made, and the discussions could still fall apart.

Neither company has confirmed the talks, and no price has been reported. Modine was worth about $5.6 billion before the news.

Image source: Getty Images.

Why Samsung would want Modine

AI chips run hot, and someone has to cool them.

That's been perfect for Modine, which makes cooling systems for data centers and has been seeing that business boom. In its fiscal second quarter, which ended Sept. 30, the Data Centers segment's sales rose 95% from a year earlier to $439.7 million, primarily from sales to hyperscale customers in North America, according to the company's earnings release. CEO Neil Brinker pointed to "record orders and backlog" in the segment.

That far outpaced total sales, which rose 35% to $994.4 million, while adjusted earnings per share climbed 27% to $1.35.

Separately, the company's Commercial HVAC segment, which makes heating, ventilation, and coil products, grew sales by 23% to $285.5 million, and Brinker said it has "expanding opportunities to serve the data center cooling market" as well. To keep up with demand, Modine has signed long-term agreements with multiple suppliers to secure critical components for its existing backlog.

Meanwhile, Samsung has already shown it wants a piece of this market. Last year, it agreed to buy FläktGroup, a European data center cooling company, for about 1.5 billion euros. Buying Modine would be a much bigger bet.

Modine just made itself easier to buy

The timing is interesting. On Oct. 1, Modine completed the spin-off of its Performance Technologies business, which serves automotive, commercial vehicle, and power generation customers, and combined it with Gentherm (NASDAQ:THRM). What's left of Modine is almost entirely data center cooling and commercial heating and air conditioning. The company even plans to change its name to Modexus Solutions. "The new name reflects the company's position as a diversified thermal management company serving high-growth markets," Modine said when it announced the name change.

Without the spin-off business, Modine expects revenue to grow 50% to 55% this fiscal year, to $3.1 billion to $3.2 billion, with adjusted EBITDA of $470 million to $500 million.

There is one potential wrinkle. For two years after the Oct. 1 spin-off, Modine's tax agreement with Gentherm bars it from taking any action, including a transaction with a third party, that "would be reasonably likely to adversely affect" the deal's intended tax-free treatment. If Modine causes that treatment to fail, the agreement makes it responsible for the resulting taxes. That could shape how any deal with Samsung is structured.

The risks of buying now

Growth has come at a cost for Modine, so that's one important consideration long-term investors should keep in mind. Data Centers gross margin fell 4.7 percentage points to 19.7%, which Modine blamed on higher material, component, and tariff costs. Free cash flow was negative $145.6 million in the first half of the fiscal year as the company spent heavily on new capacity and inventory.

The bigger risk is the deal itself. If Samsung walks away, the stock could give back much of Friday's gain. And if a deal does happen, your upside is likely capped near whatever Samsung agrees to pay.

Is it too late to buy?

For new investors, probably yes, at least for now. Buying after a 29% jump on an unconfirmed report is a bet on the deal, not the business.

The better move is to wait. Modine holds its Analyst and Investor Day on Nov. 18, when it plans to share longer-term revenue and earnings targets. By then, investors may also know more about Samsung's intentions.

Even without a deal, Modine is one of the clearest ways to own the AI buildout beyond chipmakers. If you believe in data center stocks for the long haul, it belongs on your watch list. Just don't pay a takeover price for a takeover that hasn't happened.

Jonathan Ponciano has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Gentherm and Modine Manufacturing. The Motley Fool has a disclosure policy.